GameStop 2007 Annual Report Download - page 79

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translated at an average rate over the period. Currency translation adjustments are recorded as a component of other
comprehensive income. Transaction gains and (losses) are included in net income and amounted to $8,575, ($962)
and $2,606 for the 52 weeks ended February 2, 2008, the 53 weeks ended February 3, 2007 and the 52 weeks ended
January 28, 2006, respectively. The increase in foreign currency gains in fiscal 2007 is primarily due to the decrease
in the value of the U.S. dollar compared to the functional currencies in the countries the Company operates in
internationally, primarily the Euro, the Canadian dollar and the Australian dollar.
The merger with Electronics Boutique has significantly increased the Company’s exposure to foreign currency
fluctuations because a larger amount of the Company’s business is now transacted in foreign currencies. While
Historical GameStop generally did not enter into derivative instruments with respect to foreign currency risks,
Electronics Boutique routinely used forward exchange contracts and cross-currency swaps to manage currency risk
and had a number of open positions designated as hedge transactions as of the merger date. The Company
discontinued hedge accounting treatment for all derivative instruments acquired in connection with the mergers.
The Company follows the provisions of Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (“SFAS 133”), as amended by Statement of Financial Accounting
Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the
derivative is designated as part of a hedge transaction, and if it is, depending on the type of hedge transaction.
The Company uses forward exchange contracts, foreign currency options and cross-currency swaps, (together,
the “Foreign Currency Contracts”) to manage currency risk primarily related to intercompany loans denominated in
non-functional currencies and certain foreign currency assets and liabilities. These Foreign Currency Contracts are
not designated as hedges and, therefore, changes in the fair values of these derivatives are recognized in earnings,
thereby offsetting the current earnings effect of the re-measurement of related intercompany loans and foreign
currency assets and liabilities. The aggregate fair value of these Foreign Currency Contracts at February 2, 2008 was
a liability of $7,627, of which $8,649 is included in accrued liabilities, and $1,041 is included in other long-term
liabilities, with offsetting amounts of $2,052 included in prepaid expenses and other current assets and $11 included
in other non-current assets in the accompanying consolidated balance sheet. The aggregate fair value of these
Foreign Currency Contracts at February 3, 2007 was a liability of $1,892, of which $2,540 is included in accrued
liabilities, and $390 is included in other long-term liabilities, with an offsetting amount of $1,038 included in other
noncurrent assets in the accompanying consolidated balance sheet.
Net Earnings Per Common Share
Net earnings per common share is presented in accordance with Statement of Financial Accounting Standards
No. 128, Earnings Per Share. Basic earnings per common share is computed by dividing the net income available to
common stockholders by the weighted average number of common shares outstanding during the period. Diluted
earnings per common share is computed by dividing the net income available to common stockholders by the
weighted average number of common shares outstanding and potentially dilutive securities outstanding during the
period. Potentially dilutive securities include stock options and unvested restricted stock outstanding during the
period, using the treasury stock method. Potentially dilutive securities are excluded from the computations of
diluted earnings per share if their effect would be antidilutive. Note 4 provides additional information regarding net
earnings per common share.
Stock Options
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based Payment, (“SFAS 123(R)”). This Statement requires
companies to expense the estimated fair value of stock options and similar equity instruments issued to employees
in their financial statements. Previously, companies were required to calculate the estimated fair value of these
F-12
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)